Documents show how Kaupthing turned a shambles into a crisis

The corporate loan book of Icelandic bank Kaupthing is by any standards an
extraordinary document.

Personal view by Tony Shearer

10:03PM BST 09 Aug 2009

We know this because currently circulating on the internet is a file entitled Kaupthing Corporate Credit: Presentation Of Large Exposures €45m (£38m). It is dated September 25 2008 – a couple of weeks before the bank went bust.

It would seem to be a presentation to the senior management of Kaupthing and covers loans made by that group including by their operations in Iceland, the United Kingdom and Luxembourg. Over 210 pages it lists something like 205 entities that owed more than €6bn. What is extraordinary about this document is that it represents such an unbalanced book of business. No sensible bank would have lent these sorts of amounts to such a very narrow customer base, drawn mainly from Iceland and including some very entrepreneurial characters.

In almost all cases the security described is inadequate and in most cases simply does not exist. According to the document, many of the loans are secured by shares of the lender, Kaupthing, which if right, is hardly security of any kind at all.

Most apparent is how inexact, imprecise and general is the language used to describe the loans and the possibilities that they might be recovered. The document ends with the strap line "Kaupthing Bank; Thinking Beyond". Some thinking.

Whilst the scale of this is surprising, it is merely what the FSA was told in the summer of 2005 before they approved the change of control allowing Kaupthing to purchase the British bank Singer & Friedlander.

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The chairman and chief executive of the FSA told the Treasury Select Committee earlier this year that the relevant legislation required the regulator to "passport in" Kaupthing – meaning it was the Icelandic regulator's job to supervise the deal. They said that the watchdog had no choice but to approve the change of control.

This was misleading. The FSA had the ability to talk to the Icelandic regulator to help it regulate the entity properly and had every opportunity to warn its political master of the issues.

I do not yet know whether they did any of these things as they have so far refused my Freedom of Information requests.

Does any of this matter? Yes, for at least two reasons. First, on July 31 2009 the Treasury Select Committee published its report Banking Crisis: Regulation And Supervision. It states: "By any measure the FSA has failed dreadfully in its supervision of the banking sector, but it has already begun to rectify its mistakes."

There is every evidence that it failed dreadfully, but no evidence that the FSA has recognised, let alone rectified, any mistakes. It is true that the FSA is now far more active in regulating, but no evidence that this regulation is any more effective than it was previously. As there are daily reports that the banks have learned nothing and are gearing up their operations all over again, this really does matter.

Secondly, some depositors have lost a lot of money (as have shareholders, taxpayers, pensioners and future pensioners). The management of Kaupthing Singer & Friedlander Isle of Man placed over half the company's gross assets with Kaupthing Singer & Friedlander in the UK, where they are now mostly frozen. As and when this extraordinary loan book is liquidated, how much of their money will depositors get back?

This latest example of the apparently appalling standards of one of the banks operating in London is an indication that the Treasury Select Committee has been a little hasty in thinking that the FSA is rectifying its mistakes and a reminder that the banks and regulators need to be more open with us about what they have learned. They have to convince us that we can trust them with more than £1 trillion of our money that they have used to support the banks.

Tony Shearer is the former chief executive of Singer & Friedlander before the British bank was taken over by Kaupthing